Standing Committee B

[Part I]

[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.)

Nicholas Winterton: If hon. Members want to take jackets or cardigans off, they are free to do so, as I indicated earlier.Clause 34 Time limit and right to further review

Clause 34 - Time limit and right to further review

Stephen O'Brien: I beg to move amendment No. 123, in
clause 34, page 26, line 23, leave out 'given' and insert 'issued by the taxpayer'.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 124, in
clause 34, page 26, line 26, leave out 'given' and insert 'issued by the Commissioners.'.

Stephen O'Brien: Welcome back from the comfort break, as you would describe it, Sir Nicholas.
 We are discussing import and export civil penalties. The clause sets down the time limit for requesting a review by Her Majesty's Customs and Excise of decisions when it is contended that a breach of a Customs requirement has taken place. Cutting straight to the chase, rather than describing the provision in great detail, the problem as we see it, and the reason for the amendments, is that the time limit is based on the time at which ''relevant notice is given''. In the interests of clarity, particularly for small businesses, which are uppermost in my mind, it would be helpful to have the phrase ''relevant notice . . . given'' defined, so that all parties know whether it refers to the date when the notice is prepared, the date when it is issued, or the date when it is received by the taxpayer. 
 The solution to the problem, as contained in the amendments, is that the time limit for an appeal should run from the date that the notice is issued, which should be on the notice itself. The time limit for a reply should run to the date on which the taxpayer issues a reply. The Economic Secretary might say that the argument against that is that, although basing a time limit for appeal on the time that the notice is received by the taxpayer is helpful to the taxpayer, it is likely to cause additional debate and argument, and that would not aid the simplification that is sought. The provision is a prime example of where we should hesitate and consider the balance to be struck between the taxing authorities and the citizens of this country—the taxpayers. When provisions are finely balanced, we should always err on the side of the taxpayer, who 
 often will not have the same resources to be able to contend with the public authorities. 
 I do not want to water down anti-avoidance measures. I repeat that we are all on the side of anti-avoidance. However, simply because something is cloaked with the term ''anti-avoidance'' we cannot defer, or ignore, the normal rights and balances that should be uppermost in the minds of all hon. Members. 
 Amendments Nos. 123 and 124 would put into effect the recommended solution to this serious and important matter that I have outlined. The solution is wholly consistent with the normal approach that we would expect to apply in relations between the potentially over-mighty state and the citizen taxpayer of this country. With those comments, I hope that the amendment will find favour with the Minister.

John Healey: Clause 33 provides the taxpayer with the right to require Customs to review its decision that a taxpayer is liable for a civil penalty, whether or not a penalty has actually been imposed. Clause 34 sets time limits in which a person requiring a review under clause 33 must notify Customs. It also provides the right to require a decision to be reviewed a second or subsequent time, but only when new facts or matters are presented.
 Amendments Nos. 123 and 124, which the hon. Member for Eddisbury (Mr. O'Brien) has tabled, are clearly aimed at clarification, as he said. I contend that they are unnecessary and in some ways unhelpful. If accepted, they would provide the opportunity for potential abuse of the time limits by the taxpayer and Customs. The amendments rightly identify ''given'' as a key word in clause 34(1) and (2). In both subsections, that can rightly be interpreted as meaning that the notice referred to must be both issued and received. However, the amendments provide only for the issue of a notice, in one case by the taxpayer and in the other by Customs. 
 The hon. Gentleman is seeking clarity, so I shall try to be clear for the record. We shall resist amendment No. 123 because it would give unscrupulous taxpayers the opportunity to claim that they had missed deadlines about which they knew nothing. Amendment No. 124 would give Customs the opportunity to put the taxpayer in the same, unfair position. The use of the word ''given'', with its meaning of the notice being both issued and received, offers the necessary protection to both parties: the taxpayer in clause 34(2) and Customs in 34(1).

Jonathan Djanogly: If that is the case, why could the Bill not say ''issued and received'' to give the clarity that the Government intend to apply, rather than have the current wording, which does not seem to say either?

John Healey: I believe that the formulation has sufficient certainty and clarity. We are essentially following established precedent, as I shall explain in a moment.
 Accepting the amendments would create practical difficulties, frustrating the proper process of the provision. If amendment No. 123 were accepted, a taxpayer could claim that a notice requiring a review had been issued, and could complain that no review had taken place or leave Customs with an impossibly short time in which to conduct a proper review. Conversely, adopting the wording in amendment No. 124 could disadvantage a taxpayer who had not received the notice containing the original decision, in the event of non-receipt because the time period had expired before he became aware of the disputed decision, or in the event of late receipt because he was left insufficient time in which to marshal his arguments against the decision. 
 In passing, I draw the Committee's attention to clause 34(4), which makes it clear that Customs will be able to review its decisions in appropriate cases in which the taxpayer has not given it a notice requiring such a review within the time limit set down. The facts of each case will determine whether Customs exercises that option. It may take into account such factors as postal delays, computer breakdown and illness of key personnel. The regime is comparable to the excise regime, in which the same deadlines and arrangements as those in clause 34 apply. 
 The taxpayer must give a notice to Customs if they require a review, and must do so within 45 days of receiving notice of the disputed decision. 
 I accept that the amendments are well intentioned, but they are unnecessary and, to a degree, unhelpful, as the wording in the clause already achieves the effect that he desires. I hope that, in the light of my comments, he will seek leave to withdraw the amendment.

Stephen O'Brien: I have listened carefully to the Economic Secretary and I take his arguments at face value and in good faith. The difficulty remains that I am as yet unclear whether the phrase ''relevant notice is given'' replicates standard practice across all the relevant legislation relating to taxpayers. It is incumbent on us to ensure that, even though many of the clauses are dealt with by high-powered professionals who advise various clients, legislation should be usable by small businesses without advice. That is certainly part of the tax rewrite project approach, and it has been confirmed that the Government have attempted to style the clause in that manner.
 In the colloquial way in which it is used, most people regard the phrase ''when notice is given'' as notice that has emanated from the person giving it. It does not necessarily mean that it is ''received'', although I can understand how the Economic Secretary sought to argue that point. Therefore, ''issued and received'' would have been a good way of dealing with the problem, as my hon. Friend the Member for Huntingdon (Mr. Djanogly) mentioned. If our amendments were adopted, ''issued'' would cover the point on both sides of the equation. The simple way to deal with such matters is to make sure that a notice is sent by recorded delivery, so that a person knows that it has been received. That seems to be a practical solution. As I have not been satisfied by the Minister's response, I wish to press the amendment. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 8, Noes 16.

Question accordingly negatived. 
 Clause 34 ordered to stand part of the Bill.

Clause 35 - Powers of Commissioners on a review

Stephen O'Brien: I beg to move amendment No. 131, in
clause 35, page 27, line 13, leave out 'confirmed the decision' and insert 
 'varied the decision as requested by the applicant'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 132, in 
clause 35, page 27, line 15, leave out from 'which' to end of line 18 and insert— 
 '— 
 (a) the notice requiring a review issued by the person or his representative in accordance with section 33 is received by the Commissioners, or 
 (b) the review is agreed to by the Commissioners as mentioned in section 34(4).'.
 Amendment No. 120, in 
clause 36, page 27, line 25, leave out 
 '(including any confirmation under section 35(4))'.

Stephen O'Brien: Given the arguments that relate to clauses 35 and 36, I am grateful, Sir Nicholas, that you have adjusted the order in which we consider the amendments. The arguments are slightly different from those that we have just considered on clause 34, the result of which was disappointing. I shall not have to repeat my arguments on clause 35 when we discuss clause 36.
 Clause 35 sets out the powers of the commissioners and the time limit for giving notice of their determination on a review. I shall briefly outline the problem as I see it. Subsection (4) provides that if the commissioners do not give notice of their review decision within 45 days, it shall be taken that they have confirmed their decision. That means that any inactivity on the part of the commissioners, for whatever reason, prejudices the position of the taxpayer in that one avenue of appeal is removed. A powerful argument has been made not just by Opposition Members but by others who have been advising us that the provision is unacceptable, given the relative resources of commissioners and small businesses. That is very much in line with arguments that have been made earlier. 
 The solution for clause 35 can be found in amendments Nos. 131 and 132 and for clause 36 in amendment No. 120. The recommendation is to consider how the burden might be reversed so that the commissioners are required to notify the taxpayer of their decision within 45 days. If they do not, it should be assumed that the commissioners have varied the decision in the applicant's favour. 
 To protect against situations in which taxpayers do not ensure that the commissioners receive notification promptly, it would be appropriate for the time limit of 45 days to reply to run from the date of receipt of notification by the commissioners, which can easily be established.

John Burnett: Is the hon. Gentleman as concerned about the clause as I am? It is as though the Executive were trying to usurp the function of the judiciary. Is not this a preposterous clause?

Stephen O'Brien: The hon. Gentleman may have detected a theme in the criticisms and observations that we have consistently made. We have been trying to establish the standard that accords with natural expectations and established precedents of justice in this country, while at the same time fully recognising that the Government, whether they have a large or small majority, are entitled to levy and to receive revenue that is due to them under the law, and to ensure that that is done efficiently.
 The citizens of this country—our constituents—deserve our protection. I hope that the hon. Gentleman recognises that our approach in scrutinising the legislation has consistently been to consider very carefully the rights, checks and balances that must exist, particularly for statutory enforcement. He mentioned the potential for the Executive to usurp the judiciary, which in the world out there could sound a little like part of a constitutional law course. None the less, the question is absolutely key to the principles that we rightly are expected to adopt and adhere to when we consider legislation. 
 I am grateful to the hon. Gentleman, who helps to pinpoint our deep anxieties and concerns about many enforcement aspects of the Bill. That said, the Economic Secretary is putting up a consistent line of defence against the argument, and is making it clear that the Government need more draconian powers than have hitherto applied. That can be discussed again on Report, when we will consider the totality of what has taken place. 
 As we go through the Bill clause by clause, it is important that we consider carefully the merits of the case for each clause. The points made earlier will no doubt be hotly debated on Report, unless the Government see their way to accommodating some of the concerns that have been highlighted. Amendments Nos. 131 and 132 consistently apply that set of principles and do not damage the potential for revenue. 
 We are considering amendment No. 120, which relates to clause 36, for the convenience of the Committee at this time, and it will no doubt be formally moved at some point. I shall pray in aid the arguments I have used for amendments Nos. 131 and 132 in debating amendment No. 120, which is a reference to a deletion. I hope that with those arguments the Economic Secretary will see fit to accommodate the genuine anxieties and concerns and recognise that the matter is part of the balance to be struck between the potential prosecuting and adjudication authorities in Customs and Excise and the rights of the taxpayer.

Nicholas Winterton: Order. Before I call the Economic Secretary, I should tell the hon. Gentleman who leads for the Opposition on these amendments that amendment No. 120 is being taken with this group and will not need to be moved. If the hon. Gentleman wants a separate Division on that amendment, the Chair will give it some consideration, but the only amendment that is usually pressed to a Division is the lead amendment, which in this case is amendment No. 131. That is what happens unless I receive a special request that the Opposition want to push a particular amendment, which is not the lead amendment, to a Division.

Stephen O'Brien: For the convenience of the Committee, as the amendments all relate to the same point and argument, I shall be content to seek a vote only on the lead amendment if the Economic Secretary's reply does not satisfy us—which I hope will not be the case.

Nicholas Winterton: The Committee is grateful to the hon. Gentleman.

John Healey: I sincerely hope that I can satisfy the hon. Gentleman and his hon. Friends, and the hon. Member for Torridge and West Devon (Mr. Burnett), on that point.
 On amendment No. 131, clause 35 sets out what Customs may do following a review of a decision that a taxpayer is liable to a penalty or a review of the amount of any penalty. It also provides that a review decision should be communicated to the taxpayer within 45 days of a request to review being received. If that is not done, subsection (4) ensures that the taxpayer may assume that the original decision has been confirmed. 
 For the benefit of the hon. Member for Torridge and West Devon and to reassure the hon. Member for Eddisbury that the powers are not draconian, I can explain the purpose of the provision. Subsection (4) ensures that, when unavoidable delays occur, taxpayers have some certainty and can, should they choose, lodge a formal appeal with the independent VAT and duties tribunal. In other words, that is not a draconian power, but a practical provision. It makes no presumption about and does not prejudice any subsequent consideration by the tribunal, and it is not, as the hon. Member for Eddisbury claimed, a case of the Executive usurping the function of the judiciary, because the confirmed decision of the commissioners is then subject to appeal before the tribunal.

John Burnett: Does the Economic Secretary accept that subsection (4) demeans the commissioners? I am concerned that it may do so. There will be occasions when they may legitimately want more time. A sole commissioner may be sitting and he may be ill before he can write his judgment or come to an opinion on the matter. Has the Economic Secretary considered that?

John Healey: Yes, but the balance of judgment in this case is to provide certainty for the business that could be challenged, so that, whatever the response of Customs, and especially if, for whatever reason, there is an unavoidable delay of more than 45 days, the trader knows that it can, should it choose to do so, take the case to the tribunal without further delay.

Rob Marris: Perhaps the Economic Secretary and other hon. Members are aware that a similar provision has existed in planning law for many years. When somebody lodges an application for planning permission and the local authority fails to make a decision within six weeks, that becomes a deemed refusal and provides certainty. The person who made the application can then, if they wish, appeal that deemed refusal or give the local authority more time. Is that not a parallel with this power?

John Healey: That was a helpful intervention from my hon. Friend. He draws an interesting parallel. The provisions that we are proposing to put in place for the new civil penalties regime are already in place for the excise regime. Therefore, there is nothing new in the ground that we are establishing in this clause.

Jonathan Djanogly: Generally speaking, I would not rush to planning law to look for best practice.
 The Economic Secretary mentioned certainty, but I do not believe that there is certainty in this provision. It is all very well to say that the commissioners can be appealed, but that does not give certainty to the taxpayer, who will have costs on the appeal and will want to make sure that the decision is taken at the time. If the amendment is not accepted, the commissioners could decide not to review the cases in hand; they could simply ignore the cases coming to them.

John Healey: We included this provision precisely because we wanted to ensure that any challenges to the decisions of Customs and Excise are dealt with in a timely way and, if necessary, independently of the VAT and duties tribunal. Without it, there may be an indeterminate period before a trader gets the commissioners' judgment after an application for review. I hope that that is clear. It certainly is to some of my hon. Friends who are nodding, and I am grateful to them for that.
 Amendment No. 131 would punish unavoidable delays by ensuring that failure to respond to a notice requiring review would have whatever result the taxpayer sought, irrespective of the merits of the case. I urge the hon. Member for Eddisbury to pause a moment and reflect on the possible practical consequences of such a provision. At its most extreme, every taxpayer may be tempted to request a review, on the ground that there is no liability. An orchestrated campaign could easily leave Customs powerless to undertake detailed reviews within the deadlines, with the result that taxpayers who were properly assessed could escape penalty. 
 There may be valid reasons for the delay, including the illness of a pivotal departmental official, a significant computer breakdown or a severe postal disruption. It is clearly unreasonable to attempt to punish such delays, as proposed by the amendment. 
 I remind members of the Committee of my earlier remarks about the ability of Customs, through clause 34(4), to agree to entertain a request for a review outwith the normal time limits if the taxpayer has experienced unavoidable delays.

Jonathan Djanogly: Surely the purpose of the Bill is not to cater for the sicknesses of individuals in the Inland Revenue. Surely the point is that people want determination within a set period and it is up to the authorities to ensure that they have the organisation to deliver that.

John Healey: The hon. Gentleman's point underlines mine. Customs and Excise manages the regime, not the Inland Revenue.
 The purpose of the clause, as with the excise regime, is to ensure that traders who believe that judgments are flawed can challenge them and know that that challenge can be made in a timely way. If, for any unavoidable reason, Customs and Excise is unable to meet its part of the arrangement within 45 days, that trader, irrespective of any delays or problems with Customs and Excise, may choose to take the case to a tribunal.

Michael Jack: The Minister said that the procedure is paralleled by similar procedures under existing Customs and Excise legislation. Can he tell the Committee whether Customs and Excise has received representations from any representative body complaining about the existing procedures and their operation?

John Healey: I regret that I cannot at this stage give a certain response to that question. However, I shall examine it and, if such representations have been received, I will write to the right hon. Gentleman and send a copy to Committee members. I ask my hon. Friends to resist the amendment if the hon. Member for Eddisbury chooses to press it.
 Amendment No. 132 seeks to clarify where no clarification is necessary. The clause provides for a 45-day period from the day on which the review is required by the taxpayer under clause 33. Customs and Excise must receive a notice of requirement to be aware of the need to review and the mechanism by which it is made aware is already provided in clauses 33 and 34(1). I hope that I have demonstrated that the amendment is unnecessary and that hon. Gentleman will choose not to press it. 
 On amendment No. 120, let me say that clause 36 sets out a number of rights and powers concerning tribunals, including the listing of decisions that may be appealed against. To provide certainty, clause 36(1) makes it clear that when Customs and Excise has failed to notify a review decision within the specified period and is consequently deemed to have upheld the original decision in accordance with clause 35(4), the taxpayer has the certainty that he can appeal to a tribunal against the upheld decision should he wish to do so. The same arrangements and powers operate under the excise regime. The amendment would remove that element of certainty for the taxpayer, and I hope that Opposition Members will reflect on that and not press the amendment.

Stephen O'Brien: I have listened carefully to the Minister and recognise the encompassing approach of clauses 35 and 36.
 The hon. Member for Wolverhampton, South-West (Rob Marris) made an interesting intervention, which the Minister found telling. There is a clear answer to the parallel that he drew with planning law, in addition to the incisive observation from my hon. Friend the Member for Huntingdon. The basis of planning law is that a citizen seeks to have something granted by public authorities, whereas the taxing authorities would not be in that position and a review would not be sought if the taxing authorities were not seeking to extract something from the citizen. If one examines carefully the directions that the propositions in those two examples would give, planning law has a slightly different context than the clause, under which the taxpayer needs to be given protection.

John Burnett: A more searing and important reason for the analogy being completely inappropriate is that a local planning authority is an arm of the Executive, albeit of local government. The commissioners are part of a judicial and independent function.

Stephen O'Brien: I am grateful to the hon. Gentleman, who made an important point that supports an intervention on the previous clause. On the basis that that can be distinguished, the issue is certainty. There is a balance of argument between certainty for the taxing authorities and certainty for taxpayers. One person's draconian power is another person's potential oppression. We must consider that carefully, and while those phrases may seem extreme, they represent the extremes of the argument.
 The Minister sought to rely on the difficulty that the amendments might encourage an orchestrated campaign, but, as we are dealing with civil penalties, I respectfully submit that he must not overlook the interplay between the civil penalties and the remaining criminal penalties. If there was an orchestrated campaign or conspiracy, criminal jurisdictions would apply. That is a problem, and the Economic Secretary would not want civil penalties to be substituted. That is a fair distinction. 
 It is interesting that PricewaterhouseCoopers said of clause 35, and in support the amendment: 
''This amendment seeks to remove an unwelcome development. As the relevant clause . . . stands, if the time limit for the Commissioners to reply passes, they are treated as confirming their original notice. This rewards inaction and penalises the taxpayer, who must then appeal to the Tribunal. This does not seem the right balance. In other areas (notably tax clearances) a lack of reply means a decision in the taxpayer's favour. I would not like to see this form of decision by inaction becoming the norm.''
 That is the nub of the arguments that we have tried to put across. The amendments may seem at first flush to be de minimis, but they go to the heart of the balance between taxpayers and taxing authorities. 
 As my arguments do not appear to have gained the Minister's favour, I shall press the amendment to a vote. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 9, Noes 15.

Question accordingly negatived. 
 Clause 35 ordered to stand part of the Bill. 
 Clause 36 ordered to stand part of the Bill.

Clause 37 - Appeal Tribunals

John Healey: I beg to move amendment No. 158, in
clause 37, page 28, line 4, leave out '35' and insert '36'.
 Clause 37 provides for appeals against decisions by Customs and Excise to be settled by agreement. It also allows for the recovery of costs awarded against an appellant as though they were customs duty. It is sometimes possible to settle appeal cases by agreement rather than by resorting to a tribunal hearing. The provision, which will result in savings for all parties, mirrors the provisions in use in the VAT civil penalty regime. 
 I have written to the hon. Member for Eddisbury and other members of the Committee about Government amendment No. 158 explaining that an incorrect reference has unfortunately been included in the published clause. The clause should refer to section 36 of the proposed legislation but instead refers to section 35. The Government amendment therefore corrects the clerical error.

Stephen O'Brien: I am grateful to the Economic Secretary for writing to all members of the Committee. We agree with the amendment, although I am cross that I had not spotted the mistake because I thought that I had read the Bill from cover to cover.
 Amendment agreed to. 
 Clause 37, as amended, ordered to stand part of the Bill.

Clause 38 - Admissibility of certain

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien: The clause relates to the admissibility of certain statements and documents. I want to place on the record the concerns expressed by the Institute of Chartered Accountants in England and Wales. We have not tabled an amendment, but if issues surface in the light of the Economic Secretary's remarks, further consideration may be given to the clause on Report.
 The ICAEW states: 
''Clauses 38, 98 and 203 are all related to the difference in treatment accorded to direct and indirect taxes and the existence of the hitherto clear Hansard procedure for direct tax which precluded criminal prosecution where a successful negotiation of civil penalty and full disclosure has been made.
We believe the reservation of the right to use information obtained in the process of a successfully negotiated civil settlement without adequate safeguards is contrary to the Human Rights Act 1998 and contravenes the Human Rights Convention.''
 We have discussed the matter before and the Economic Secretary has revealed why he believes that our concerns are not founded. It is nevertheless helpful to put the concerns on the record and it will be interesting to hear what he has to say. ICAEW goes on: 
''Information obtained as part of a settlement should be inadmissible and a taxpayer who has successfully agreed a settlement should be free from the fear of criminal prosecution unless he has broken the requirements of disclosure. Clause 203 has, we feel, removed the certainty given in the House last November in respect of Hansard. Clause 38 replicates the existing anomaly within section 60(4)''
 of the Value Added Tax Act 1994. My hon. Friend the Member for Hertford and Stortford (Mr. Prisk) will discuss clause 98 when we get the chance to debate stamp duty land tax. 
 The ICAEW concludes: 
''Lastly in this respect we have long sought to have a 'joined up' approach whereby a disclosure for the purposes of one tax will be accepted as a disclosure for all taxes provided the taxpayer makes it clear at the time the disclosure is made. This would be an ideal opportunity to introduce this simple but significant improvement to the civil penalties regime.''
 On the basis that I outlined earlier, I look forward to the Economic Secretary's reply.

John Healey: The hon. Member for Eddisbury has recognised why I believe that the safeguards are adequate across the piece. On the particular point that he raised on behalf of the ICA, the legislation is designed to ensure that in cases in which the taxpayer deliberately misleads Customs and Excise investigators while purporting to assist them following an inducement offer and the deception is subsequently discovered, any evidence collected may be used in a subsequent prosecution. The rule is not designed to promote admissibility; it is a provision to remove a possible bar.
 There is a major safeguard for the taxpayer: the decision whether such evidence is admissible will rest with the trial judge, who will be guided by the provisions of section 78 of the Police and Criminal Evidence Act 1984. 
 Question put and agreed to. 
 Clause 38 ordered to stand part of the Bill. 
 Clauses 39 and 40 ordered to stand part of the Bill.

Clause 41 - Regulations and orders

Question proposed, That the clause stand part of the Bill.

John Healey: The final clause in part 3 sets out the scope of the power and the nature of the procedure to make regulations by statutory instrument. Affirmative resolutions of the House will be required for regulations to amend either the maximum permitted penalty or references to Community law. Other regulations, including the schedule identifying the contraventions that can attract civil penalties, are subject to the negative resolution procedure. I can confirm that Customs and Excise will consult business sectors affected by the scope of the schedule through the trade consultation group. I will issue a draft of the schedule during the summer and expect to lay the statutory instrument before the House in the autumn.
 Question put and agreed to. 
 Clause 41 ordered to stand part of the Bill.

Clause 147 - Meaning of ''permanent establishment''

Stephen O'Brien: I beg to move amendment No. 99, in
clause 147, page 85, line 29, leave out 'business of the company' and insert 'company's trade'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 100, in 
clause 147, page 85, line 32, leave out 'do business' and insert 'engage in trading activities'.
 Amendment No. 101, in 
clause 147, page 85, line 33, at end insert— 
 '(1A) For the purposes of subsection (1)(b) an agent can only be a person who has authority to and does enter into arrangements on behalf of that person's principal which are contractually binding on that principal.'.
 Amendment No. 3, in 
clause 147, page 85, line 44, leave out paragraph (h) and insert— 
 '(2A) A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.'.

Stephen O'Brien: We move on to my final part of the Bill before the Whitsun recess. Many members of the Committee will breathe a massive sigh of relief because I am on my last lap. My hon. Friends are encouraging me to stay, but I am keen for them to have an opportunity to speak.
 Clauses 147 to 155 deal with the definition of the term ''permanent establishment''. Clause 147 is intended to set out the definition in line with the various internationally recognised characteristics commonly used in the UK's double taxation agreements. It will be effective for accounting periods beginning on or after 1 January 2003. 
 Without doing more than referring all members of the Committee to it, I commend the debate introduced by my hon. Friend the Member for Arundel and South Downs (Mr. Flight) on clause 148 in the Committee of the whole House last week. It would be helpful for members of the Committee to have in mind the arguments presented by him on that occasion and some of the responses given—I should say, issued and received. 
 I am now facing the Paymaster General instead of the Economic Secretary, and I welcome her to her place. The problem, as I understand it, is that the definition here departs in some respects from that contained in the Organisation for Economic Co-operation and Development model convention, although the relevant parts of that convention are generally contained in United Kingdom tax treaties. 
 I shall focus on clause 147(2)(h), to which I shall rapidly turn, as we have jumped 100 clauses. That might be false encouragement to some members of the Committee; no doubt we shall return to those that we have just skipped. Subsection (2)(h) treats 
''a building site or construction or installation project''
 as a ''fixed place of business'', although paragraph 3 of article 5 of the OECD model convention states: 
''A building site or construction or installation project constitutes a permanent establishment only if it lasts more than 12 months.''
 The clear and obvious solution would be to say that a building site or construction or installation project should not constitute a fixed place of business unless it lasts for more than 12 months. 
 We are concerned about the discrepancy between the meaning of permanent establishment in Untied Kingdom domestic legislation and the definition of permanent establishment in the bulk of the UK's double tax treaties. That could result, for no good reason, in different tax treatment for non-resident countries based in treaty jurisdictions and those based in non-treaty jurisdictions. 
 Amendment No. 3 replicates paragraph 3 of article 5 of the OECD model convention. Obviously, an alternative approach would have been to redraft subsection (2)(h) to read, 
''a building site or construction or installation project that lasts for more than 12 months'',
 which would compare to paragraph 2(g) of article 4 of the treaty with France. However, that would be less favourable than amendment No. 3, because a building site or construction or installation project that lasted for less than 12 months might still amount to a fixed place of business in certain circumstances. It is worth noting that the opening of subsection (2) states that the list in paragraphs (a) to (h) is 
''without prejudice to the generality of''
 the expression ''fixed place of business''. That series of arguments has been widely supported by the Chartered Institute of Taxation, the Institute of Chartered Accountants in England and Wales and the Law Society. 
 Turning to the other amendments, the Chartered Institute of Taxation, having already commented adversely on the new definition of ''permanent establishment'', thinks that the words ''authority to do business'' in subsection 1(b) 
''are vague, and do not specify the essential criterion that the agent must be in a position to bring the principal into a binding agreement with the customer. The Inland Revenue have indicated in consultation that a person will only be treated as an 'agent' in circumstances where that person can bind the principal.''
 The Inland Revenue has confirmed that the references in subsection (1)(a) and (b) to the carrying on of business and the exercise of ''authority to do business'' are limited to business activity of a trading nature by virtue of the provisions in section 18(1)(a)(iii) of the Taxes Act 1988. Therefore, looking at amendments Nos. 99 and 100, I support the Chartered Institute of Taxation's submission that in clause 147(1)(a) the reference to the ''business of the company'' should be replaced by a reference to the ''company's trade'', and that in subsection 1(b), the words ''do business'' should be replaced with the words ''engage in trading activities''. 
 The Inland Revenue said in consultation that the permanent establishment provisions will not apply unless the non-resident is exercising a trade in the UK; in other words, the carrying on of a non-trading business activity is outside the scope of the legislation. It went on to recommend that the legislation should clarify those points to avoid any misunderstanding over whether a person acting as a representative without authority contractually to bind their principal is an agent. It also recommends that it is confirmed that references to the carrying on or exercising of authority to do business are limited to activity of a trading nature, and that investment business activity is outside the scope of the legislation. 
 Turning to what the Institute of Chartered Accountants in England and Wales has to say, as already explained, the OECD published a consultative document in March 2001 on the issues surrounding permanent establishment. The ICAEW has identified that the problem arises in relation to ''dependent agents'', a point that was made earlier. It says: 
''The authority of the agents should only apply to authorities to carry on the trade in question and not to authority to do business. This in particular will give rise to widespread compliance issues for potential agents who constitute permanent establishments even where there was no trade. These provisions should be amended accordingly.''
 It also notes that in subsection (1)(b), 
''an agent who 'habitually exercises authority to do business on behalf of the company' will constitute a Permanent Establishment of that company in the country where the agent operates. The OECD Model Treaty still only treats an agent as a Permanent Establishment when the agent '(has) and habitually (exercises) the right to conclude contracts' in that country''—
 as opposed to its having authority in that country. It continues: 
''We believe that the UK law should follow closely the relevant OECD model until such time as the OECD model is amended.''
 I turn to the Law Society. It is very interesting that the submissions of these societies all support one another, and that they have all expressed concerns about the various difficulties reflected in the different amendments. The Law Society, after agreeing with what I have just said on amendments Nos. 3, 99 and 100, says on the matter addressed by amendment No. 101: 
''The Inland Revenue have also confirmed that the reference in clause 147(1)(b) to an agent is restricted to those persons who contractually can and do bind their principals and not to persons acting in some other representative capacity falling short of having such authority.''
 The Law Society suggests, and I agree: 
''In order to clarify this point we recommend that that term 'agent' is defined to mean 'a person who has authority to and regularly does enter into arrangements on behalf of his principal which are contractually binding on that principal'.''
 For the convenience of the Committee, you have been encouraging us to raise any stand part issues at the same time as the amendments, Sir Nicholas. Recognising that, I raise some small points that the Paymaster General may wish to contemplate addressing on Report, as well as directly addressing the amendments. They pick up on some further points suggested by the ICAEW. It notes that 
''subsection (5) does not include a category (e) along the lines of the existing OECD Model Treaty. This subsection states that any combination of the activities listed under the equivalent of (5)(a) to (d) would also not constitute a Permanent Establishment. We recommend that an additional subsection along these lines be included for the avoidance of doubt and to ensure that the UK rules are consistent with the OECD rules.
This provision applies to accounting periods beginning on or after 1 January 2003. It is not acceptable for these provisions to apply before the relevant provisions are enacted. The start date should be amended so that it applies to accounting periods beginning on or after Royal Assent.''
 I put those points on the record, and they will no doubt be considered when it is available. 
 I hope that the points that I have made were as succinct as they could have been on this quite complex matter, which is definitional because it constitutes a move forward. I have sought to make arguments that jointly and severally support amendments Nos. 3, 99, 100 and 101. I hope that the Paymaster General will find that they were made sufficiently cogently for her to accept the amendments. I look forward to her response.

John Burnett: Sir Nicholas, I have not had an opportunity to welcome you. I have served under your chairmanship on many occasions, not just in various Standing Committees—you are also the Chairman of the most illustrious Committee in the House: the Procedure Committee.

Stephen O'Brien: What does the hon. Gentleman want?

John Burnett: I want an opportunity to speak about amendment No. 101 in particular, although there are good reasons for the other amendments about which the hon. Gentleman spoke. The Chartered Institute of Taxation and the Law Society have raised points, as the hon. Gentleman said. There are two simple points on amendment No. 101. First and foremost, is it right that, under British law, including British tax law, any representative can be referred to as an agent? Surely it is part and parcel of the law of agency that someone is an agent only if they can bind their principal. Any representative cannot and should not be called an agent. That is part of British law and international tax practice.
 The second point has been raised by the Law Society. As the hon. Gentleman said, the Revenue has confirmed, with reference to the definition of ''agent'', that it will treat only those persons who contractually can and do bind their principals as agents for the purposes of the clause. If that is the case, why can that not be in the Bill? That would be in the interests of the country's commercial activities. It is important that we trade overseas and welcome overseas investment. It is not in the interests of our economy to have vague laws and laws that do not stand on all fours in relation to international practice. It is in our interests for people to know exactly where they stand. I hope that the Paymaster General will accept amendment No. 101, in particular. It makes sense, is compelling and rights a wrong.

Jonathan Djanogly: My hon. Friend the Member for Eddisbury mentioned the OECD convention discrepancy. I fully agree with that point. More basically, the wording in the clause is vague, which is why I support amendment No. 99. We need to specify that the business of the company is the company's trade. I understand from what I read in the Chartered Institute of Taxation book that the Inland Revenue has indicated in consultation that the provisions in the clause will not apply unless a non-resident is exercising a trade in the United Kingdom. There is a need to make it clear that the continuation of a non-trading business activity is outside the competence of the legislation.
 May I draw the Paymaster General's attention to what appears to be a typo? In subsection (1)(b) ''there'' should presumably be ''their'', or more properly, ''the company's''. Either way, it is pretty shoddy drafting. 
 On amendment No. 101, I essentially agree with my hon. Friend's analysis. I would just add that the word ''agent'' is a commonly used expression in business and is often used where there is, and is not, authority to bind the company that is using the agent. To that extent, it is necessary to clarify whether the provision will apply only when the agent can bind its principal, not only for technical purposes, but for those of the normal taxpayer when considering the legislation.

John Burnett: Does the hon. Gentleman agree that it will be extremely confusing for overseas taxpayers sending representatives to this country if they do not have the authority to bind, and they are suddenly caught by the provisions?

Jonathan Djanogly: The hon. Gentleman makes a good point and, considering the matter the other way round, I am concerned for the English taxpayer, who is the agent and might not know where he stands.

Stephen O'Brien: My hon. Friend is making some very interesting and valuable points that support the arguments on the amendments, but to put his mind at rest on something that is not subject to the amendments, the spelling of ''there'' probably is correct in the context of the clause because it relates to territory. It happens to be rather inelegant word order, so I understand why he has found that difficult to pick up.

Jonathan Djanogly: I thank my hon. Friend for clarifying that for me.
 On amendment No. 3, I fully support what my hon. Friend said. We clearly do not want a situation in which temporary building works to build the most minor projects could be subject to the same treatment as factories and offices. A building site of less than a year is clearly not permanent.

John Baron: As we know, clause 152 replaces references in the Taxes Act 1988 to ''branch'' or ''agency'' with references to ''permanent establishments''. Clause 147 redefines the term ''permanent establishment'' in that context. The definition has been widened beyond the definition of ''branch'' and ''agency'' so that some non-resident companies, not previously subject to UK corporation tax, may become taxable under the new rules. I have one or two key concerns about that.
 First, as my hon. Friend the Member for Eddisbury has already highlighted, in certain respects the definition departs from that contained in the OECD model convention, although the relevant parts of that convention are generally contained in UK tax treaties. An example was given with regard to building sites. That is an area of concern because the discrepancy could lead for no good reason to different tax treatment for non-resident companies based on treaty jurisdictions as compared with non-treaty jurisdictions. I ask the Paymaster General to clarify that, because it would be helpful for all concerned.

Howard Flight: I wonder whether my hon. Friend has focused his mind on whether the changes could result in hedge funds outside the UK, whose transactions are frequently handled in the City of London, falling within the definition of residence. That would be a disaster for the City, because business would go elsewhere if that were the effect.

John Baron: My hon. Friend makes an excellent point. That is a consideration. When it comes to the City, competitiveness is all-important, and if the new legislation ensnarls hedge funds, it could result in the City of London and other financial cities throughout the UK losing business. I ask the Paymaster General to bear that in mind, and address the issue when she sums up.
 I turn to another issue that concerns me, and ask the Paymaster to address it. The definition of permanent establishment in clause 147 will widen the tax liabilities of foreign companies doing business in Britain. Although none of us would condone tax avoidance, I would suggest that the relatively favourable tax regime in this country for overseas companies has been one of the factors that has contributed to our economic well-being, certainly when compared with our competitors. It is no accident that our structural unemployment rate is far less than it is on the continent and across the eurozone as a whole. 
 Most independent observers would acknowledge that part of the reason for that is that we have had much more flexible practices than on the continent, thanks largely to previous Conservative Governments, part of the reason is that the United Kingdom has not signed up to the euro and part of the reason is that we have had a relatively favourable tax regime for overseas companies compared with other countries, particularly those in the eurozone and on the continent. 
 I believe that the clause threatens that tax advantage. On its own it will not be a major factor in weakening our economic competitiveness, but taken with all the other regulations on taxes with which the Government have burdened our economy since they came to power, I suggest that it will have an effect, and is having an effect now. 
 I therefore ask the Paymaster General three questions. To what extent do the Government believe that the definition of permanent establishment widens the UK tax liabilities of foreign companies? Have the Government estimated the likely impact of the definition of permanent establishment on foreign investment? Would she consider carrying out an impact assessment of those two issues to determine what effect the clause has on our economic competitiveness?

Dawn Primarolo: I congratulate the hon. Member for Eddisbury on introducing his amendments so succinctly. He is right: this is a complicated area of international tax law, relating to the combination of UK domestic law, international agreements through the OECD guidelines and the OECD's commentary on its standard guidelines. Regular members of the Finance Committee or hon. Members who, like the right hon. Member for Fylde (Mr. Jack), have in a past life been members of double taxation committees scrutinising the introduction of double taxation treaties in the United Kingdom will understand that the question of permanent establishment is crucial for determining the respective taxation rights of the United Kingdom and the country with which it is entering into the treaty. The hon. Member for Eddisbury is right that the OECD model recommends a 12-month period, but we now have more than 100 tax treaties and the time period for permanent establishments varies.
 I want to deal first with the points raised in the amendments and then turn to the other issues that hon. Members have mentioned this afternoon. 
 As I said on another clause in the Committee of the whole House, UK banks are at a tax disadvantage compared with foreign banks as regards their operation in the City of London, whether or not branches of foreign banks pay UK corporation tax. That is the point at which the clause starts.

John Baron: Will the Paymaster General give way?

Dawn Primarolo: I am happy to give way, but this is a general point about the clause rather than the amendment.

John Baron: Absolutely—point taken. I am delighted that the Paymaster General is defending UK banks, but the UK banks and the banking structure generally recognise that the tax advantages offered to foreign banks add to the vibrancy of the City and to its attractiveness as a commercial centre. Very few UK banks complain about the tax treatment of UK branches of overseas banks.

Dawn Primarolo: I do not know which branches or banks the hon. Gentleman speaks to, but not only was the tax position of foreign branches in the City of London a matter of concern, particularly compared with UK banks, but there was international concern about whether the practice was fair. As I go through the amendments, I may be able to refer back to the hon. Gentleman's point.
 Amendment No. 3 would copy into UK domestic law the existing provisions of paragraph 3 of article 5 of the OECD model tax convention by specifying that a building site, construction or installation would not constitute a permanent establishment unless it had existed for 12 months or more. If a foreign company had a building site in the UK for less than 12 months, there would be no permanent establishment, so it would not be chargeable to corporation tax in respect of its presence in the United Kingdom. A blanket 12-month time limit would not be appropriate because the general rules contained in the clause will be subject to the specific time limits contained in the United Kingdom's double taxation agreements with other countries, many of which contain a shorter time limit, such as three or six months. 
 Treaties can override domestic law to provide relief from UK tax, but they cannot create a charge to tax if none exists in UK domestic law. Therefore, if a treaty specified a time limit of six months, but UK domestic law set a time limit of 12 months, which would be the effect of the amendment, the domestic law would apply. The United Kingdom would, therefore, effectively give up taxing rights that it had achieved through bilateral negotiations with other countries. I understand that about 43 of our current treaties are for periods of less than 12 months. 
 It may help the Committee if I give an example. Our double taxation agreement with Ireland provides that a building site will constitute a permanent establishment if it exists for more than six months. After six months, Ireland can tax the profits of a UK company attributable to its Irish building site, and vice versa. However, if the UK were to introduce a 12-month time limit into domestic law, we could tax the Irish company's profits from its UK building site only if it existed for 12 months or more, even though the double taxation agreement set a six-month time limit. Therefore, the United Kingdom would be giving up taxing rights, but Ireland would not. 
 I am sure that that was not the intention of the hon. Member for Eddisbury when he tabled his amendment probing why the 12-month standard was not used. All members of the Committee can see that there is no good reason to give up taxing rights that have been agreed in negotiations with other countries. I therefore ask the Committee to reject the amendment if it is put to the vote. I have not asked anyone to calculate how much tax would be given up—it would be a substantial amount—on the basis that I understand that the amendment has been tabled to probe the 12-month issue and is not a serious suggestion that we should undermine our tax treaties in such a way. 
 I have explained why it is not appropriate to incorporate into UK law the exact wording used in paragraph 3 of article 5 of the OECD model tax convention. That is why there is no 12-month limit for building sites for permanent establishments. Hon. Members who sit on Committees that deal with double taxation will have heard me say on many occasions when discussing treaties for ratification by the House that we, like the previous Government, attempt to stick as closely as we possibly can to the wording, because we support the OECD model. However, it is not always possible to do that in negotiations, because the wording is affected by what our treaty partners seek to achieve in the negotiations. 
 However, for the purposes of the clause, the wording used in article 5 of the OECD model tax convention has been incorporated into clause 147, where possible. The OECD wording and terminology was used where it did not conflict with that commonly used in the UK's double taxation agreements, where it was clear and unambiguous and where the terminology fitted with the language commonly used in UK domestic law. Amendments Nos. 99 and 100 run contrary to that approach, as they seek to insert language that differs from that used in article 5 and from that commonly used in the UK's double taxation agreements. 
 It may be useful if I explain the two sets of circumstances in which there is deemed to be a permanent establishment. The first is if the non-resident company has a fixed place of business in the UK, and the second is if there is an agent in the UK who has the authority to do business on behalf of the company—that is, if the foreign company has what is commonly known as a dependent agent. 
 Amendments Nos. 99 and 100 seek to change that so that there will only be a fixed place of business, or a dependent agent, where there is evidence that the foreign company is trading through the fixed place of business or where there is evidence that the dependent agent has the authority to engage in trading activities on behalf of the foreign company. As I mentioned, that represents a move away from the wording generally used in the UK's double taxation agreements and from that used in the OECD model tax convention. The proposed change would also narrow the definition of permanent establishment, because the activities encompassed by the term ''trading'' are different and generally narrower than the activities encompassed by the term ''business''. 
 However, the narrower definition would not actually alter the tax position of foreign companies. That is because the permanent establishment of a foreign company is chargeable to corporation tax under section 11 of the Taxes Act 1988 only if it trades through a permanent establishment in the UK. Amendments Nos. 99 and 100 are unnecessary, as they would move away from the wording commonly used in defining a permanent establishment and would not alter in any way the tax position of the foreign company. Therefore, I ask members of the Committee to reject the amendment if it is pressed to a vote. 
 I come now to amendment No. 101. I have explained the circumstances in which a permanent establishment can exist, and explained that one such situation is if a dependent agent acts on behalf of the foreign company. The wording used in clause 147(1)(b) to define a dependent agent varies from the exact wording used in paragraph 5 of article 5 of the OECD model tax convention. It is based instead on the guidance given in the commentary on article 5, which can be found in paragraphs 31 to 35. The reason for that is that article 5 refers to the agent who has the authority to conclude contracts in the name of the enterprise. However, the OECD commentary on article 5 makes it clear that— 
 Sitting suspended for a Division in the House. 
 On resuming—

Dawn Primarolo: Before we suspended the Committee, I referred to amendment No. 101, which deals with the issue of a dependent agent acting on behalf of a foreign company. I explained to the Committee that the wording used in clause 147(1)(b) to define ''dependent agent'' varies from the exact wording in article 5(5) of the OECD model tax convention. Instead, it is based on guidance given in the commentary on article 5, which can be found in paragraphs 31 to 45, because article 5 refers to an agent who has the authority to conclude contracts in the name of the enterprise.
 However, the OECD commentary on article 5 makes it clear that that phrase is not necessarily to be taken at face value. For instance, it covers contracts in the name of an enterprise, contracts binding on the enterprise but not in its name, and contracts recognised by the agent but signed by some other person, while excluding contracts that do not relate to the business proper of the enterprise, although concluded by the agent. The area is very complicated and there is an interaction between the commentary and the article itself. 
 United Kingdom legislation cannot be directly interpreted by reference to the commentary, so the phrase used in clause 147 is intended to encapsulate the current OECD interpretation in respect of dependent agents. That would not have been achieved if the wording in article 5(5) were copied directly into UK domestic law.

John Burnett: The Paymaster General will recall that one of the arguments used by me, the hon. Member for Eddisbury and one or two others who spoke on the matter was that the Inland Revenue confirmed that the reference to an agent in clause 147 is restricted to those persons who contractually can and do bind their principals and not to persons acting in some other representative capacity falling short of having such authority. The Paymaster General is obviously well aware of Pepper v. Hart and the reliance people may put on what she says in Committee. I would welcome her comments on that point raised by the Law Society.

Dawn Primarolo: I was coming to that important point, which was outlined in a letter to the Law Society and the Chartered Institute of Taxation on 8 May.
 I was trying to explain that the article wording must be read in parallel with the commentary. The commentary needed to be part of the description that went into UK legislation in order to make that clear. In drafting the legislation, the importance of maintaining certainty on international understanding and practice on the OECD guidelines and model conventions while understanding how the commentary affects their operation was one of the major points, which was continually made to the Revenue and me. That is how we chose the clause's wording. 
 Amendment No. 101 seeks to add to the definition of dependent agent used in clause 147(1)(b). It would mean that an agent would be a dependent agent of a foreign company as long as they had the authority to enter into arrangements on its behalf and had entered into contractually binding arrangements with it. That may not have been the amendment's intended effect, but I ask the Committee to reject it nevertheless. The suggested addition is unnecessary and the language used in clause 147(1)(b) already reflects the current OECD position on dependent agents. As such, no further clarification or definition is required. 
 The hon. Members for Eddisbury and for Torridge and West Devon referred to correspondence and representations from both the Law Society and the Chartered Institute of Taxation. The Inland Revenue's view on dependent agents was set out in its letter of 8 May to the Chartered Institute of Taxation. Unfortunately, I cannot circulate the entire letter to the Committee because it covers other issues and it is up to the institute whether it wants to circulate them. However, I can ensure that the relevant parts of the letter are circulated. 
 The hon. Member for Torridge and West Devon wants the pertinent points in the letter read into the record. The letter states that the commentary—the OECD model tax convention— 
''makes it clear that the phrase 'authority to conclude contracts' in para 5 (5) is not necessarily to be taken at face value. For instance it covers contracts in the name of the enterprise, contracts binding on the enterprise but not in its name and contracts negotiated by the agent but signed by some other person, while excluding contracts which while concluded by the agent do not relate to the 'business proper' of the enterprise.''
 That was my precise point before we broke for the Division in the House. 
''Given that UK legislation cannot be interpreted by reference to the commentary except where, in treaty cases, this might lead to a different result, the phrase used is intended to encapsulate the current OECD interpretation of para 5 (5)''.
 When the hon. Member for Torridge and West Devon studies both the record of the Committee and the relevant sections of the letter from the Inland Revenue to the Chartered Institute of Taxation, he will feel happier about the issue. 
 I again ask the hon. Member for Eddisbury to withdraw the amendment. If he feels unable to withdraw it, however, I will ask my hon. Friends to reject it. The Bill does not extend the charge to tax on non-resident companies and there is no less certainty for an agent of a non-resident company on whether they are within the charge to corporation tax. The rules are set out in the OECD treaty and commentary and in UK law, which has had and will have specific rules to facilitate foreign investment in the City. 
 I apologise for the length and detail of my response to the hon. Gentleman's questions and amendments, but I hope that I have made it clear that clause 147 provides the certainty that business requires on the issues of dependent agent, permanent establishment and the need for certainty in the rules. I therefore ask the hon. Gentleman to withdraw the amendment.

Stephen O'Brien: I am grateful to the Paymaster General for patiently setting out the reasons behind the drafting and the various complex considerations. She will recognise that the amendment and the broader arguments that I adduced in support of it in my introductory remarks necessarily took in a wide but detailed canvas, which is the nature of the clause.
 I have listened carefully to the Paymaster General's argument. Amendment No. 3 relates to the 12-month period, and it forms no part of our argument wittingly or unwittingly to forsake revenue due to the Treasury. At the same time, we were looking for certainty. I make no apology for not being an expert in more than 100 double tax treaties and she is far more likely than I to be expert on them. I have, however, served on several Standing Committees and Delegated Legislation Committees that have examined the double taxation treaties. I understand that there are variations and that the model that informs them is, of course, a model and not a prescription. I will not therefore seek to press amendment No. 3. 
 Remarks made by the hon. Member for Gravesham (Mr. Pond) were ill-judged. He thought that the amendments were an attempt to argue for tax harmonisation across Europe. The point was unworthy, cheap and unnecessary given that we are looking for sufficient consistency and understanding to give certainty to those who must deal with those matters. He knows that—this point was well made by my hon. Friend the Member for Huntingdon—anything that attacks and erodes the UK's tax competitiveness is anathema to my hon. Friends and me. 
 We have put forward a series of arguments on amendments Nos. 99 and 100 and the Paymaster General has addressed them. I can therefore confirm that we will not press the amendments. 
 However, we are not in a position to seek to withdraw amendment No. 101. Although the Paymaster General set out with some care why she felt that the commentary could not be incorporated into domestic UK legislation, it is important to put down a marker on the concerns raised by the clause, some of which were articulated by the hon. Member for Torridge and West Devon. I should also like to emphasise that my hon. Friend the Member for Arundel and South Downs was very concerned, rightly, about the position of hedge funds, which form a significant sector of UK business.

Dawn Primarolo: I apologise. I did have a point to make about hedge funds. The position is the same as at present. If the manager of a hedge fund is independent, the same tests apply as before. They are not within the scope of corporation tax. The rules are the same.

Stephen O'Brien: I am grateful to the Paymaster General, who anticipated what I was about to say. My hon. Friend the Member for Arundel and South Downs raised what is an important point, not least because were the Paymaster General not able to say what she has just said, there would be, to coin a phrase, real concern about ''flight'' capital. I was seeking confirmation that, in relation to hedge funds that are not based in the UK, the provisions will not affect the way in which business is done in London, bearing in mind the interaction between management in London and the broker agreement.
 What the Paymaster General said was helpful. I am also grateful to her for saying that she will make available to all members of the Committee the relevant extracts from the letter to the Chartered Institute of Taxation and the Law Society. Clearly, they made a number of representations on the clause. 
 On the basis that it is important to register that there has been concern and to demonstrate that the matter has been properly considered, I will press amendment No. 101 to a vote. What lies on the record underpinning the arguments in relation to the incorporation of the commentary has been noted and we will be able to proceed on that basis. By pressing for a vote, we can convey to all those who are concerned that the matter has been fully considered. 
 I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Amendment proposed: No. 101, in 
clause 147, page 85, line 33, at end insert— 
 '(1A) For the purposes of subsection (1)(b) an agent can only be a person who has authority to and does enter into arrangements on behalf of that person's principal which are contractually binding on that principal.'.—[Mr. Stephen O'Brien.]
 Question put, That the amendment be made:—
The Committee divided: Ayes 10, Noes 17.

Question accordingly negatived. 
 Clause 147 ordered to stand part of the Bill.

Clause 149 - Non-resident companies: assessment,

Stephen O'Brien: I beg to move amendment No. 95, in
clause 149, page 89, line 15, at end insert— 
 '(3A) Where the UK representative of a non-resident company is a person separate from that company it shall be entitled— 
 (a) to be indemnified in respect of any liability that it discharges as mentioned in subsection (3)(a) above; and 
 (b) to retain, out of any sums otherwise due from it to the non-resident company, or received by it on behalf of the non-resident company, amounts sufficient for meeting any obligations or liabilities that he has under subsection (1) above or has discharged as mentioned in subsection (3)(a) above. 
 (3B) The obligations relating to the furnishing of information which are imposed by this section on the UK representative in a case where that representative is an independent agent shall not require that representative to do anything except so far as it is practicable for the representative to do so by acting to the best of his knowledge and belief after having taken all reasonable steps to obtain the necessary information. 
 (3C) Subsection (3B) above shall not have the effect of discharging the non-resident company from any obligation to furnish information in a case where that obligation has been discharged by its UK representative by virtue only of subsection (3B) above.'.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 96, in
clause 149, page 89, line 34, at end insert— 
 ' ''independent agent'', in relation to a non-resident company, means any person who is the non-resident company's UK representative in respect of any agency from the non-resident company in which he was acting on the non-resident's behalf in an independent capacity; and a person shall not be regarded as acting in an independent capacity on behalf of a non-resident company unless, having regard to its legal, financial and commercial characteristics, the relationship between them is a relationship between persons carrying on independent businesses that deal with each other at arm's length;'.

Stephen O'Brien: It is of great relief to find that I am not alone in finding some of the issues before us very complex, because it is clear that other Committee members do as well. The issues reward a certain amount of study, to say the least. There was a moment, shortly after we resumed, when I hoped that the Paymaster General would make very few remarks, because, at that point, we might have been able to prevail in the vote, but, unfortunately, she had to continue, and I dare say that that was not 100 miles from her mind at the time.
 That said, we move to clause 149. As I mentioned earlier, clause 148 was dealt with in Committee of the whole House ably and cogently by my hon. Friend the Member for Arundel and South Downs. Clause 149(1) will make the UK representative of a non-resident company that is trading in the UK through a permanent establishment—that is the UK representative—liable for non-resident companies corporation tax. When the UK representative is a separate person—that is an agent rather than a branch of the company—it is appropriate that he should have right of recovery or retention in respect of the corporation tax liability. Subsection 3A in amendment No. 95 would address that point.

Rob Marris: In the second line of proposed subsection (3A), the word ''it'' appears. To which entity does ''it'' apply?

Stephen O'Brien: I am glad that the hon. Gentleman is so avidly following the cogency of my arguments. In that context, ''it'' refers to the UK representative of a non-resident company.

Rob Marris: Not to the preceding noun.

Stephen O'Brien: Indeed, the hon. Gentleman is right. We have tried to follow the way that the rest of the Bill is drafted. The wording is clear, given that the clause deals with that aspect and is so titled. I hope that that clarification helps. I do not believe that that discloses a flaw because I believe the amendment will be interpreted correctly by those familiar with such provisions in the professional world.
 On amendment No. 95, it is worth comparing schedule 23 to the Finance Act 1995, in which obligations are imposed on UK representatives, although the right of recovery in that case is limited to independent agents of the non-resident company. New subsections (3B) and (3C), which are also contained in amendment No. 95, restore provisions of the existing law—namely schedule 23 paragraphs 4(1), and 4(2)(a) of the 1995 Act. 
 Frankly, I think that amendment No. 96 speaks for itself. My very aged legal training reminds me that the applicable phrase is res ipsa loquitur, and the definition of ''independent agent'' is clearly set out. It adds clarification to the clause and its context in the Bill, and I hope that it will find favour with the Paymaster General, who will consider it a helpful suggestion.

Dawn Primarolo: The amendments would introduce indemnities and protections for independent agents who are the tax representatives of non-resident companies. As the amendments replicate the existing provisions of schedule 23 to the Finance Act 1995, I assume that they are prompted by the fact that previously an independent agent could be a tax representative, so an indemnity was desirable and included in the legislation. However, the clause provides that tax representatives for non-resident companies are now their permanent establishments, so independent agents who are prevented from being the permanent establishments of non-resident companies by clause 147(3) cannot be the tax representatives of non-resident companies. Therefore, the amendments are unnecessary.
 Independent agents may continue to be the tax representatives of persons other than non-resident companies. They will, however, continue to enjoy the equivalent protections proposed by the amendment, which can be found in schedule 23 to the Finance Act 1995. 
 I hope that the hon. Gentleman will accept that his probing amendment demonstrates that the coverage is there, the indemnity is not necessary and the permanent establishment requirement for the non-resident company is met. I ask him to seek to withdraw the amendment, but if he feels unable to do so and puts it to a vote, I shall ask my hon. Friends to oppose it.

Stephen O'Brien: I am grateful to the Paymaster General for that succinct and clear explanation. She rightly identified, as I believe I had done, the replication of existing law.
 The essence of the clarification is the interaction between this clause and clause 147, which has just been agreed to. Therefore, because of the definitional change, the question whether an unbroken chain of indemnification is required is no longer relevant. I accept the Paymaster General's helpful explanation and am glad that it is on the record. I therefore beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 149 ordered to stand part of the Bill.

Clause 150 - Non-resident companies: extent

Stephen O'Brien: I beg to move amendment No. 97, in
clause 150, page 90, leave out lines 5 to 7.
 This is a probing amendment relating to non-resident companies and the extent of charge to income tax. The clause provides that a non-resident is subject to income tax by withholding only in the case of income falling within subsection (2), rather unhelpfully referred to as 
''income to which this section applies''
 and on other UK-source income in respect of which it is not liable to corporation tax. 
 I tabled an amendment to probe the position, because it is not clear to me why, on calculating the tax on income falling within paragraph (b)—other UK-source income in respect of which a non-resident is not liable to corporation tax—one has to disregard relief under double tax treaty as required by subsection (1)(a)(ii). There is probably a sound technical explanation, but it escapes me, so I look forward to hearing what the Paymaster General has to say.

Dawn Primarolo: I am grateful to the hon. Gentleman for tabling this probing amendment to tease out the precise interactions between the clauses that follow on from clause 147. The amendment would upset the existing basis of computing the limit of income tax on foreign companies from investments in the UK other than property and from any trading in the UK through a broker or investment manager. At present, the maximum such foreign companies can pay is the tax, if any, deducted at source.
 The clause is a consequential adjustment to replicate exactly the effect of section 128 of the Finance Act 1995 on foreign companies. It is necessary following the change from ''branch or agency'' to ''permanent establishment'' that is introduced by clause 147. 
 The subsection that the amendment seeks to leave out does not prevent double taxation relief from being claimed. The position regarding such relief remains exactly as it was, and the clause limits the income tax chargeable before double taxation relief, as was previously the case. The double taxation relief would be given in any assessment, subject to the usual rules. That ensures that the UK income tax liability of a non-resident company is properly aligned to the amount due in accordance with any relevant tax treaty. 
 I hope that the hon. Gentleman will accept that explanation. He may feel that he wants to study the issues a little more, but I hope that he is reassured that the clause is, as I said, a consequential adjustment to replicate exactly the effect of section 128 of the Finance Act 1995 on foreign companies.

Stephen O'Brien: I am grateful to the Paymaster General for that clear explanation, which demonstrates an internal consistency in the light of clause 147. Therefore, as I indicated that this was a probing amendment, and as I am satisfied with the explanation, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 150 ordered to stand part of the Bill.

Clause 151 - Non-resident companies: transactions

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien: We have discussed several clauses for which the meat is found in a schedule. Therefore, I shall proceed on the basis of registering the fact that the Conservatives will not object to the clause stand part, but our agreement is subject to the way in which we discuss the amendments that we have proposed on schedule 26, which supports clause 151. The formal procedures do not allow us to reflect our concerns at this point.

Nicholas Winterton: The hon. Gentleman will be able to deal with the amendments that have been selected and, if necessary, I will be happy to grant a stand part on the schedule. However, based on the way in which the Committee has been proceeding, I suspect that most of the matters will be dealt with in detail during the discussion on the lead amendment and those that will be taken with it.
 Question put and agreed to. 
 Clause 151 ordered to stand part of the Bill.

Schedule 26 - Non-resident companies: transactions

Stephen O'Brien: I beg to move amendment No. 92A, in
schedule 26, page 344, leave out lines 36 to 38 and insert— 
 '(c) either— 
 (i) the remuneration he receives in respect of the transaction for the provision of the services of a broker to the non-resident company is not less than is customary for that class of business; or 
 (ii) he acts on behalf of the non-resident company in relation to the transaction in an independent capacity; and'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 93, in 
schedule 26, page 345, leave out lines 12 and 13 and insert— 
 '(c) either— 
 (i) the remuneration he receives in respect of the transaction for the provision to the non-resident company of investment management services is not less than is customary for that class of business; or 
 (ii) he acts on behalf of the non-resident company in relation to the transaction in an independent capacity; and'.
 Amendment No. 94, in 
schedule 26, page 345, leave out lines 15 to 17.

Stephen O'Brien: We come to schedule 26; this is the first time that we have strayed into the second volume of the Bill. The amendments relate to a similar line of argument.
 The schedule largely re-enacts the existing law in section 127 of the Finance Act 1995 and the Opposition find it broadly acceptable. However, paragraph 2(c)(ii) seems to be anti-competitive because, if a broker is prepared to carry on business for less than the usual level of fee or commission, he risks becoming a permanent establishment of a non-resident company and liable for any corporation tax chargeable on the non-resident company as a consequence of transactions carried out through it. Amendment No. 92A would provide that a lower-than-customary fee or commission could safely be charged provided that the broker acted in an ''independent'' capacity. That is covered by paragraph 7(2) of the schedule.

John Burnett: I appreciate that the Opposition do not have armies of civil servants to help us. Does the hon. Gentleman mean by ''independent'' not connected within the meaning of the Taxes Act 1988 and not an associated or subsidiary company? Can he give a slightly more detailed description of what he means by ''independent''?

Stephen O'Brien: It is important that I do not seek to advance arguments for putting in legislation words and definitions that are not well established within the meaning of independence. The definition of a broker acting in an independent capacity is already contained in the Bill and earlier tax legislation. The issue at stake is not so much the question of how the action takes place in an independent capacity, which is established, but the way in which the provisions work. When a broker transacts business for a lower-than-customary fee or commission, he must act in an independent capacity; otherwise, there would be a link that would raise other presumptions.

Rob Marris: In paragraph 2(1) of the schedule, the words ''independent status'' are used. Under amendment No. 92A, paragraph 2(2)(c) would contain the word incapacity—that is a Freudian slip. I meant to say that the words ''independent capacity'' are used. It seems to me and, perhaps, the hon. Gentleman, that his amendment is suggesting a circular definition. Perhaps he can help the Committee by differentiating between independent status and independent capacity.

Stephen O'Brien: The hon. Gentleman will accept that paragraph 3(2)(c) refers to ''independent capacity'' and that is replicated in the amendment. We tried to be consistent with the schedule and I shall delineate the issue. The schedule must work and is largely a re-enactment. It is not trying to reinvent anything, but it is trying to provide a greater degree of consistency and clarification.
 Amendment No. 92A would solve the difficulty in paragraph 2(2)(c) of schedule 26, replacing what is in line 36 with new wording. Paragraph 3(2)(e) suffers from the same defect, so we propose both to delete that paragraph and replace paragraph 3(2)(c) with the wording in amendment No. 93, which picks up on the exact wording that amendment No. 92A identifies. We would then have total internal consistency because the phrase ''independent capacity'' is already used in paragraph 3 but not found in paragraph 2 as it stands. Hence, although the hon. Gentleman thought that our proposal was circular, we are actually attempting to square the circle in the schedule, providing internal consistency and ensuring that the measure works fairly and properly. Paragraph 3(2) already contains the requirement for an investment manager to act in an independent capacity, so if we replaced paragraph 3(2)(c) with the wording in amendment No. 93, that would improve the drafting. 
 A further, general point is supported by the Chartered Institute of Taxation, which has said: 
''Schedule 26 paragraph 3 deals with investment transactions carried out through investment managers. Subsection (3) defines investment transactions. The wording in paragraph 3(a) needs to include contracts for differences. We understand that the provisions of schedule 26 are exclusive and not complementary to the main provisions relating to Permanent Establishments. We trust that this will be reflected in Revenue published guidance.''
 Another general point is that the OECD model treaty does not contain anything along the lines of schedule 26, but I shall not take up that point because I have listened carefully to what the Paymaster General has said on the matching of these provisions with the OECD model treaty. I recognise that there are some distinctions to be drawn, not least to reflect the variation in more than 100 double tax treaties. I have been able to study some of those, but there are clearly various differences. I realise that that requires recognition in the drafting that the model cannot be adopted verbatim in all respects. 
 I hope that that proves to be a helpful explanation. It has taken not a little effort to reach this point, and I hope that the amendments are considered to be serious and to have a helpful intent. I hope that they will be accepted.

Dawn Primarolo: I have listened carefully to what the hon. Member for Eddisbury has said in support of his amendments, but I am still at a loss to understand why he wishes to change a part of the Bill that has been in place and operated without complaint for the past eight years. Schedule 26 maintains the current rules in section 127 of the Finance Act 1995. I cannot remember whether the right hon. Member for Fylde was Financial Secretary then, but I shall absolutely forgive him if this measure does not immediately spring to the front of his memory.
 These rules were introduced in the 1995 Act to remove a potential impediment to the City winning and maintaining its investment business with non-residents. I understand that the original rules were drawn up after extensive consultation with the City to ensure that they worked well. Having established the rules in 1995, which the Government think have now operated well for eight years, the schedule will bring those same rules forward. 
 I was rather surprised to hear the hon. Member for Eddisbury introduce amendments that would weaken the anti-avoidance provision in those rules. Normally, Ministers get to hear requests and lobbying for the weakening of anti-avoidance legislation, and the Inland Revenue certainly does, but that came as something of a surprise. I assure the hon. Gentleman that there has been no change, but I must tell him that it is not our intention to countenance any change either. Although we are not seeking to strengthen any of the anti-avoidance provisions of the Finance Act 1995, we certainly will not support an amendment that would relax the anti-avoidance provisions that have been in place for eight years. 
 The amendments would weaken the anti-avoidance provisions by introducing an either/or test, whereas the existing legislation requires both conditions to be met for investment managers, and the first test to be met by brokers. Although I absolutely commend the hon. Gentleman for avidly reading the 1995 Act, on this occasion the advice that he has been given may not have been entirely appropriate, and I hope that he will withdraw his amendment. If he seeks to press the amendment to a Division, I will recommend that my hon. Friends oppose it. I hope that that is clear. 
 The rules introduced in 1995 worked for eight years following extensive consultation. They are not anti-competition. The schedule will present those rules again in the context of the change of permanent establishments. The rules have not been tightened or changed, so there is no need to disturb them, and I hope that the hon. Gentleman will not.

Stephen O'Brien: I am grateful to the Paymaster General for setting out the matter so clearly. I could not help but detect a certain revelry in her response, for some reason. The year that I joined the Conservative party—let alone when I got involved in politics—was the year of that particular Finance Act.

Dawn Primarolo: I apologise if there was just a touch of glee in what I said. The hon. Gentleman has spoken a great deal about anti-avoidance measures, and I am afraid that he has to carry his party's responsibility for things that it has done in this House, as I do for things that my party may have done in the past, or may do in future.

Stephen O'Brien: I fully accept without question the terms of appeal that the Paymaster General has just offered. There is no intention on my part to weaken the anti-avoidance provisions, which is why the clarification is helpful. My intention was to achieve a certain internal consistency. The Paymaster General points out that the amendment might weaken the anti-avoidance provisions, which is completely contrary to what was in my mind in introducing the amendments. I am delighted to confirm that my right hon. Friend the Member for Fylde got it right first time.

Michael Jack: I am grateful to my hon. Friend for the view that he has just formed. Although it may be a distant dot in the past, his understanding of it now must be entirely correct. I am delighted that on this occasion he appears to be taking the Paymaster General's advice.

Stephen O'Brien: This unity across all parts of the Committee is really something, as I will certainly not press the amendment to a vote.
 The advantage of going through these matters with a fresh eye is that we at times find that the Conservatives' record in the last Parliament was something that we can be very proud of. It has stood the test of time, so much so that the current Government feel that there is no room for improvement on the very successful policies that were in place at the time. 
 I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Schedule 26 agreed to.

Clause 152 - General replacement of refrences to

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien: I want to raise a short point on behalf of the Law Society. No amendment is proposed. The clause lists the instances in which the terms ''branch'' or ''agency'' are to be changed in the existing legislation. The Law Society says:
''We are concerned at how these changes are tracked through. For example, sub-clause (2) states that section 606(13) of the Taxes Act 1988 is amended, yet this section refers back to the definition in section 118 of the Taxes Management Act 1970, which is itself repealed in its entirety by Schedule 43 in the Bill.''
 Is there a consequential amendment to come, possibly on Report?

Dawn Primarolo: The hon. Gentleman rightly said that the clause replaces the term ''branch'' or ''agency'' by ''permanent establishment'' in the relevant parts of the Taxes Act 1988. He specifically asked about subsection (2). Section 606(13) of the 1988 Act is amended by schedule 27 of the Bill. As a result, there is no longer a reference to section 118 of the Taxes Management Act 1970. There is no error.

Stephen O'Brien: I am grateful to the Paymaster General. That is noted and accepted.
 Question put and agreed to. 
 Clause 152 ordered to stand part of the Bill.

Clause 153 - Double taxation relief: profits attributable

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien: The clause does not address the position of non-resident companies trading in the UK through permanent establishments, but is applicable to UK resident companies that have overseas permanent establishments. It amends section 797 of the Taxes Act 1988, which limits the credit for foreign taxes to the UK corporation tax rate.
 The clause inserts into section 797 a new subsection (2A), which says that the chargeable profits attributable to an overseas permanent establishment are to be determined using, to coin another Latin phrase, mutatis mutandis, the rules in new section 11AA of the Taxes Act, introduced by clause 148(2) of the Bill for the purpose of taxing UK permanent establishments of non-resident companies. 
 Having explained the clause on that basis, I want to put it on the record that we regard the clause not only as unobjectionable, but as something that we support. 
 Question put and agreed to. 
 Clause 153 ordered to stand part of the Bill. 
 Clause 154 ordered to stand part of the Bill. 
 Schedule 27 agreed to.

Clause 155 - Overseas life insurance companies

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien: As I come to the last clause that I shall be dealing with before the Whitsun recess, I will be sharing a sigh of relief with all the other Committee members.
 The clause gives the Treasury power to make regulations rewriting the tax treatment of overseas life insurance companies. It also applies to overseas life insurance companies the new rules on the treatment of permanent establishments contained in clauses 147 to 153 and schedules 26 and 27. The matter is of great concern. Some people have even argued that it is unacceptable to have the whole code by which overseas life insurance companies are taxed rewritten without adequate parliamentary scrutiny. The clause does not permit any consideration of the regulations by Parliament. It does not even contain any guidance as to the nature of the changes that might be made. 
 As a matter of principle, it would normally be my position, and that of Her Majesty's official Opposition, to consider voting against the clause in such circumstances, because that is critical, particularly when there is a code that affects a whole sector of business and when there has not been the necessary scrutiny, including sight of the general guidance and consideration of the regulations. However, I hope that the Paymaster General will provide an explanation, so I shall reserve my position until I have heard what she has to say.

John Burnett: I, too, was disturbed to read the clause, which is quite extraordinary. Not only will the regulations not have any parliamentary scrutiny, but some of them will be deemed to have had effect as from 1 January 2003. The Liberal Democrats also wait with baited breath to hear what the Paymaster General has to say. We hope that our quite justified fears will be allayed.

Dawn Primarolo: There has been special legislation for overseas life insurance companies since 1915. There was a major reform of the legislation in 1993. Members of the Committee will not be surprised to hear that that legislation was long and complicated. Soon after its introduction, whether by coincidence or design, the number of overseas life insurance companies carrying on business in the United Kingdom declined rapidly. Now, the number of pages of legislation dealing with overseas life insurance companies is many times the number of the companies to which it applies. In the circumstances, I thought it sensible that the new rules for the non-resident companies in clauses 147 to 154 should be made to apply to the overseas life insurance companies, with all the necessary modification done in secondary legislation.
 I entirely understand the point made by the hon. Members for Eddisbury and for Torridge and West Devon. On 16 April, the Inland Revenue published a draft of the regulations that will be made under the clause when it passes into law. The draft regulations are currently the subject of consultation with interested parties. I understand that there are currently six companies that will be affected. Once the consultation has been completed, although the regulations are subject to negative procedure, they will be considered in a Committee on Delegated Legislation. If the hon. Members for Torridge and West Devon and for Eddisbury have not received a copy of the draft regulations but would like one for bed-time reading, or if any member of the Committee would like a copy, I will ensure that copies are sent. 
 Given the difficulties that have existed in this area, I thought it best to proceed on the basis of consultation and agreement with the interested parties, of which there is a small number compared with other areas of taxation. At present, the regulations are being discussed with them. I would be happy to let members of the Committee know those organisations' views on the regulations.

Michael Jack: The Paymaster General has given a very helpful explanation as to the meaning of the clause. Can she say why such a sparse explanation for the inclusion of this clause in the Bill was given in the notes on clauses? If it had been fuller, we might not have had to have a debate on the clause.

Dawn Primarolo: I take note of the right hon. Gentleman's comments. Perhaps the information on the clause could have more specifically explained the situation. I am sure that he, better than anyone else in the Committee, knows that none of us can put our hand on our heart and say that the vast amounts of information that have to be made available are perfect. However, with hindsight, we might have done things slightly differently.
 I hope that the explanation that I have given members of the Committee satisfies them. They will know that I take very seriously the matter of proper scrutiny by the House.

John Burnett: Can the Paymaster General give the Committee any indication of the ramifications of the regulations? The clause refers to overseas life insurance companies. Will the regulations have any consequences for UK taxpayers and UK tax-paying companies?

Dawn Primarolo: I believe that the answer is no. It is a very specialised area, but I am confident that I am not misleading the hon. Gentleman or the Committee. However, I shall check and, if I am not correct, I shall write to the hon. Gentleman. My understanding is that there are no implications for UK taxpayers.

Stephen O'Brien: I am genuinely grateful to the Paymaster General for setting that out and for recognising—it probably came as no surprise to her—that I was not aware of a consultation process with the interested parties. I believe that six companies are involved. The draft regulations have been published within a discrete net of interested parties but have not been placed in the Library, so they were not available to me. Therefore, I am glad that the matter has been raised.
 I hope that the Paymaster General respects the fact that I indicated that I was not minded to vote against clause stand part if there was a satisfactory explanation. Therefore, I shall urge my hon. Friends not to vote against it, in the light of her commitment to letting us know the result of the consultation. It would be helpful if the draft regulations were placed in the Library, and she might wish to provide copies, dependent on what the rest of the Committee indicate to her, perhaps informally. I would have thought that the spokesmen for the parties would be interested in having a look at the regulations at this stage. I shall try to include them in my day-time rather than bed-time reading. 
 The answer that the Paymaster General gave to my right hon. Friend the Member for Fylde recognised their shared experience of office in their respective times. She said that it was wrong to criticise a deficiency in providing information, but the fact that it will now be remedied is helpful and respected. We shall not hold up progress, and will be happy to agree to stand part. 
 Question put and agreed to. 
 Clause 155 ordered to stand part of the Bill.

Nicholas Winterton: I am sure that I speak for the whole Committee when I congratulate the hon. Member for Eddisbury on the marathon that he has undertaken. I wish him a restful Whitsun recess. Those remarks apply to the Economic Secretary, who has also undertaken a strenuous marathon.Clause 163 Avoidance affecting proceeds of balancing event

Clause 163 - Avoidance affecting proceeds

Howard Flight: I beg to move amendment No. 9, in
clause 163, page 106, line 9, at beginning insert 'or would' after the bracket.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 10, in 
clause 163, page 106, line 11, leave out subsection (2) and insert— 
 '(2) If, as a result of a tax avoidance scheme, the amount to be brought into account as the proceeds from the event is less than it would otherwise have been, the amount of any balancing allowance to which the taxpayer would otherwise be entitled shall be equal to the amount that (but for the provisions of this section) it would have been if the tax avoidance scheme had not been implemented.'.
 Amendment No. 11, in 
clause 163, page 106, line 17, after 'to', insert 'reduce or'.
 Amendment No. 12, in 
clause 163, page 106, line 19, at end insert 'in full'.

Howard Flight: Sir Nicholas, may I add my welcome to your chairmanship of the proceedings? You may have to listen to my voice for the next two sittings, so I shall be speedy.
 Clause 163 introduces measures to counter an avoidance scheme, which should be blocked. The remedy it proposes is disproportionate to the abuse, however, because it denies the full amount of any balancing allowance that the asset owner claims rather than the proportion attributable to the scheme. The explanatory note is not strictly accurate because the detailed explanation refers to the denial of a balancing allowance on a fall in value, which is incorrect because the clause would entirely deny any allowance. 
 The Paymaster General knows that the amendment has the broad support of the Law Society and other professionals. She may argue that we should not pussyfoot around because the Government are trying to block tax avoidance, but it is traditional in British law that remedies should be proportionate. The amendment is designed to reduce the balancing allowance by the reduction in proceeds caused by the tax avoidance scheme, which is proportionate.

Dawn Primarolo: I shall ask my hon. Friends to oppose the amendment to the anti-avoidance provision in clause 163, which seeks to limit the clause's potential deterrent effect. It would allow a business entering into a tax avoidance scheme a balancing allowance equal to the amount that the allowance might have been had the avoidance scheme not been entered into. That is the amendment's purpose, although its precise meaning was not entirely clear until the hon. Gentleman spelled it out.
 Perhaps it would help if I explained the avoidance mechanism: if we allowed the avoidance scheme to continue it would cost the British taxpayer some £500 million in lost revenue over the next three years. This is how the scheme operates: company A owns an industrial building that qualifies for capital allowances with, for example, a value of £1 million. Company A borrows 110 per cent. of the unencumbered market value of the property—in the example, £1.1 million—from company B, which is another group member. The loan is secured by way of a charge over the property. Company A then sells the property subject to the charge to another group member, company C, for £1. The liability under the loan remains with company A. Company C then grants company A a lease of the property at a peppercorn rent. The effect of the scheme is to trigger a balance in allowance of the whole, unrelieved, qualifying expenditure: £1 million less £1. The broad effect is thus equivalent to an immediate, upfront allowance of 100 per cent. of the unrelieved capital charge. We are not prepared to tolerate that. That is not the purpose of the provisions that are in effect. 
 The scheme occurs in an area of tax law that gives some £25 billion of relief through capital allowances each year. The hon. Member for Arundel and South Downs wants it both ways. If a company gets caught using the avoidance scheme, we would pretend that it was not using it, but still allow it to have the balancing allowance. I quote from Lord Green in the case of Lord Howard de Walden v. Commissioners of Inland Revenue, from page 134 of ''25 Tax Cases'': 
''It scarcely lies in the mouth of a taxpayer who plays with fire to complain of burnt fingers.''
 The anti-avoidance provision is intended to send a clear message to deter people from engaging in the scheme. If they persist in using it, and the Inland Revenue reveals that, it is wholly inappropriate that they would get access to the balancing allowance, and I ask the Committee to reject the amendments.

Adam Price: Perhaps the Paymaster General would give her response to the criticism that the definition of tax avoidance scheme under the clause is too broad. It defines a tax avoidance scheme or arrangement as one in which the main purpose, or one of the main purposes, is the obtaining of tax advantage by the taxpayer. How one defines what is the main purpose seems to have been left rather open-ended. For instance, it could be possible to argue that an arrangement has an improvement of the tax position as a purpose, but it was not the main purpose of the arrangement. There could be all sorts of debate about that. Would it not be preferable to define a tax avoidance scheme as one in which the sole or main purpose was the obtaining of the tax advantage?

Michael Jack: This is one of those rare occasions when I rise to express sympathy with the view of the Paymaster General. I say to my hon. Friend the Member for Arundel and South Downs that had I been doing the same job as the Paymaster General, confronted with the enormity of the financial gain from a scheme such as this, I would have come down on it like a ton of bricks. There is a difference between sloppily drafted tax law that people take advantage of leading to the Treasury going somewhat over the top in trying to tie up their failings in the drafting, and the exploitation of a scheme. Someone has clearly looked at the provision and seen it as a way of driving a proverbial coach and horses through the spirit of the original legislation.
 It is not that there were no capital allowances. It sounds from what the Paymaster General has said that the avoidance scheme has been exploited to such an extent that it goes against the spirit and purpose of the legislation. Under those circumstances, I do not blame the Revenue for trying to plug the hole. If someone has gone to the extent of obtaining professional advice to drive that coach and horses through the tax legislation, knowing exactly what they were about, I, for one, would not be in favour of giving them any mitigation because what seemed like a nice little earner is, rightly, cut off at the knees. Giving them a little something on the side is going over the top. I am less than sympathetic with my hon. Friend's amendment.

Howard Flight: I draw the Committee's attention to the fact that I said at the beginning that the clause counters an avoidance scheme that needs to be blocked. The Paymaster General did not respond to my second point that the notes on clauses describe incorrectly the way in which the clause operates, so it was entirely appropriate to ask about the balancing item. I understand the attitude of my right hon. Friend the Member for Fylde, but it has been a long-standing principle of British law that remedies should be proportionate. It is the general view of tax counsel that in this case it is inappropriate for the remedies not to be proportionate.
 However, part of the purpose of the amendment was to probe the Minister and to discover exactly what was intended. When we debate subsequent clauses, we shall find that such problems often arise—as with the tonnage tax—when taxation is over-complicated. Incentives are exploited and we end up going round and round and making the legislation more complicated. The purpose of the allowances is obviously desirable economically, but they will tend to invite such problems.

Dawn Primarolo: I know that the hon. Gentleman is fully aware of the way in which capital allowances and the legislation evolved under the preceding Government. The importance of capital allowances is clear. The hon. Gentleman referred to ambiguity in paragraph 12 of the notes on clauses, but there is clarity in the summary and details in the explanatory notes and there are just a couple of words at the end of the sentence that need not be there.
 The hon. Member for East Carmarthen and Dinefwr (Adam Price) referred to precedent. We are following the precedent of the definition of avoidance in the capital allowances Acts, so it is a well-trodden path. 
Mr. Burnett rose—

Dawn Primarolo: The hon. Gentleman may not intervene on an intervention.

Howard Flight: I am grateful to the Paymaster General for her comments, but perhaps she should not let her power go over the top.

John Burnett: I wonder whether it would help the hon. Member for East Carmarthen and Dinefwr to know that the words,
''a scheme or arrangement the main purpose, or one of the main purposes of which, is the obtaining of a tax advantage by the taxpayer''
 constitute an expression well known to practitioners and the courts.

Nicholas Winterton: As the Division Bell is ringing, I shall ask for the tolerance and patience of the Committee if we adjourn for 35 minutes, including the Division. That is to enable me to have my weekly weigh-in for WeightWatchers at 6 o'clock.
 Sitting suspended for a Division in the House. 
 [Continued in column 165]